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The codex says - "Beasts. Karanak is always fielded with a unit of Flesh Hounds, picked as a normal Elites choice. Karanak is simply an upgrade charcter for this unit."

So would upgrading one to a Karanak cost me an Elites slot in my army list or would it be just an upgrade to the unit?

I do believe you have answered your own question. Karanak is an upgrade character for the hounds...so no he does not take an elite slot.